The following item is a Letter of Intent of the government
of Romania, which describes the policies that Romania intends to
implement in the context of its request for financial support from
the IMF. The document, which is the property of Romania, is being
made available on the IMF website by agreement with the member as
a service to users of the IMF
website.

In the first half of 2004, our main economic objectives were met. All
performance criteria (PCs) were observed, except for the end-June quantitative
PC on reducing private sector arrears to the general consolidated budget.
On the basis of the corrective actions specified in the SMEFP (paragraph
14), we request a waiver for the nonobservance of this PC and a modification
of the September and December PCs on the same indicator. In addition,
continuing strong growth in domestic demand, only partly compensated by
rapid output growth, necessitates some adjustments of program policies.
In line with our decision to tighten fiscal policy, we request a modification
of the PC on the general government deficit. The SMEFP also specifies
the main elements of macroeconomic policies in 2005.

The Government believes that the policies set forth in the attached SMEFP
are adequate to achieve the objectives of its program and ensure sustainable
macroeconomic developments in 2004-06, but it will take any further measures
that may become appropriate for this purpose. Romania will consult with
the Fund on the adoption of these measures, and in advance of revisions
to the policies contained in the SMEFP, in accordance with the Fund's
policies on such consultation.

1. This memorandum supplements the Memorandum on Economic and Financial
Policies for 2004-06 (MEFP) finalized at the onset of the Stand-By Arrangement
(SBA), which was approved by the IMF Board on July 7, 2004, and describes
additional policy objectives and measures agreed in the context of the
first review under the arrangement.

II. Background

2. Fiscal and monetary policies continue to be in line with the program,
but domestic demand has remained stronger than expected. Fiscal tightening,
reduction in losses in state-owned enterprises (SOEs), and prudent monetary
policies contributed to a reduction in inflation from 14 percent at end-2003
to around 12 percent in July 2004. Moreover, disinflation was achieved
without adverse effects on GDP growth, which accelerated to above 6 percent
in the first half of 2004. Romania's external position strengthened further,
with official reserves increasing to 4.6 months of prospective imports
at end-June 2004 from about 3.9 months at end-2003. However, growth in
domestic demand has not subsided as expected. As a result, the current
account deficit, after declining in Q1, picked up again in Q2. This suggests
a need for some additional measures in the remainder of the year to prevent
overheating.

3. Fiscal policy has remained on track. The rectified budget approved
on July 15 envisaged a general government deficit of 2.1 percent of GDP
in 2004. Revenue performance is impressive, owing to our stepped-up efforts
to improve collections and the strong economy. To contain accumulation
of tax arrears, we have initiated bankruptcy procedures against 65 tax
nonpayers among the 452 private companies with the largest arrears to
the budget. Despite our efforts, however, we did not observe the corresponding
end-June quantitative performance criterion under the program. Corrective
measures are described in paragraph 14.

4. Monetary policy has been successful in reducing inflation and increasing
foreign reserves. In response to the large surplus in the foreign
exchange market of some €1.9 billion in January-June, the NBR lowered
the policy interest rate by cumulative 250 basis points since May. However,
inflows remain strong, and another €1 billion was purchased in July.
Credit growth slowed in most of H1 of 2004, but recently foreign currency-denominated
credit picked up again.

5. Further progress has been achieved in structural reforms, particularly
in the energy sector. In July, sales-purchase agreements were signed for
the privatization of Petrom and the two electricity distribution companies.
Moreover, final bids for the two gas distribution companies have been
received, and negotiations are near completion. Preparations for the sale
of two additional electricity distribution companies and three energy
generation complexes are proceeding. Owing partly to the restructuring
of the Privatization Agency, only four large loss-making SOEs were sold
or liquidated in Q2, instead of six envisaged by the structural benchmark
under the program. In line with our determination to restructure state-owned
sector, in H1 of 2004, employment in the 72 largest SOEs monitored under
the program was reduced by 15,600 employees, or by 3.6 percent. The collections
of heating bills have recently increased, but still require attention.

6. We have made decisive progress in improving our governance legislation.
In May-June, parliament approved a package of laws strengthening the independence
and powers of the judicial system. We have also strengthened the legislation
on declaration of assets by government officials and parliamentarians
and their close relatives.

III. Economic and Financial Policies in 2004 and 2005

A. Objectives and Strategy

7. Our main objective for the remainder of 2004 is to moderate growth
in domestic demand to support disinflation and contain the current account
deficit. For this purpose, we have decided to save part of the revenue
overperformance and implement further measures to slow growth of foreign
currency-denominated credit. Meanwhile, structural reform will continue
according to schedule.

8. In 2005, the main elements of our macroeconomic policy package
will be as follows: the S-I balance of the broad public sector will
be improved by about ¾ percentage point of GDP. This will be achieved
by a prudent budget policy, a modest nominal increase in the minimum wage,
a prudent wage program for SOEs, and further reforms in the energy, railway
and mining sectors. Monetary policy will monitor vigilantly developments
in credit and implement further measures if necessary. As always, we stand
ready implement additional measures if our current account or disinflation
targets come under strain.

B. Fiscal Policy

9. In 2004, we will save part of the revenue overperformance relative
to the projection in the first supplementary budget. To this end,
we approved a second supplementary budget, which limited additional spending
to lei 11,400 billion (prior action). Local governments, over which the
central government has only limited control, are expected to increase
spending by lei 4,300 billion, reflecting their higher revenue collections.
To avoid incurring arrears following higher than expected spending in
H1 of 2004, the central government budget allocation for public health
will be increased by lei 2,272 billion, while we will take measures to
improve spending controls. We will increase subsidies for the mining companies
by lei 300 billion, which will facilitate severance payments for further
reducing employment. Additional expenditures of lei 2,978 billion will
be allocated to the pension fund to compensate for less-than-full CPI-indexation
for pensioners that retired before April 1, 2001 and the change in the
indexation scheme in 2005. Specifically, pensions will be increased by
5¼ percent for pensioners who retired under law 3/1997 and who
receive a pension lower than three times the average gross economy-wide
wage. The increase in pensions will be accompanied by shifting the indexation
entirely to a CPI basis. Other expenditures will be increased by lei 1,550
billion. The revised deficit target appears in Table 1.
We are committed to saving any additional revenue overperformance to further
reduce the deficit of the general consolidated budget (excluding local
authorities), as demonstrated by the deficit target adjustor (TMU,
section III), and will not initiate or approve a third budget rectification
of the 2004 budget. If the current account deficit worsens, we will implement
additional measures, including expenditure cuts.

10. Fiscal policy in the broad public sector will be tightened in
2005. To keep the current account deficit target no greater than the
2004 one, at below 5½ percent of GDP, we will continue with measures
to improve the financial performance of SOEs by adjusting energy prices
and implementing tight wage policy in SOEs. The estimated improvement
in SOEs' S-I balance will be equivalent to 0.6 percent of GDP. The general
government deficit will be limited to 1.5 percent of GDP against the background
of lower growth in output than in 2004. The submission of the draft 2005
budget to parliament in line with this fiscal stance is a structural performance
criterion (PC) for October 15, 2004. We have also decided to postpone
any further decisions on new motorway construction until after the World
Bank has completed the study on prioritization of the motorway projects
in September 2004.

11. Tax policy in 2005 will further reduce the high tax burden on
labor, reduce profit tax and the personal income tax, and facilitate a
further improvement in the business climate. We have decided to reduce
the still-high social security contribution rates, which are one of the
main causes of the widespread gray economy, by 1¼ percentage points.
The profit tax will be cut rate from 25 percent to 19 percent, and the
tax rate in the lowest bracket of the personal income tax from 18 to 14
percent. At the same time we will freeze the personal income tax exemption
in nominal terms at lei 2,000,000. Moreover, we will increase the tax
on dividends for resident physical persons from 5 percent to 10 percent
and raise excise taxes in line with the schedule agreed with the EU. In
2005, profit tax revenue will benefit from the full-year effect of the
elimination of the reduced profit tax rate for exporting activities in
2004. On this basis, we are expecting revenues in an amount of lei 780
trillion and are firmly committed to limit expenditures to lei 819 trillion.
We have made the final decision on these tax reforms only after we reached
understanding with staff on the details of the expenditure side of the
2005 budget. We will not grant any tax relief for reinvested profits as
this would be unnecessary and inefficient, thereby threatening to undermine
the success of the profit tax reform (continuous structural benchmark
in the original MEFP). Furthermore, we will not broaden the scope of goods
and services subject to the reduced VAT rate of 9 percent and refrain
from introducing a second reduced VAT rate, including for books and newspapers
(continuous structural PC). Should revenue performance deteriorate in
the remainder of 2004 to the point of threatening the 2005 budget, the
scheduled adjustments in excises taxes would be moved forward from July
1, 2005, to March 1.

12. We will adjust the budget sector wage structure in 2005, which
will result in differentiated wage increases, to improve incentives for
the most skillful public servants. We have commissioned a study, in
cooperation with the World Bank, on the salary structure in the budgetary
sector. Based on the results of this study, and in consultation with the
World Bank, we will decide on salary increases, including substantial
increases for the most qualified 40,000 civil servants. The average nominal
increase will be 12.0 percent, with nominal increases taking place on
January 1 and October 1. All these reforms will result in maintaining
constant spending on budgetary sector wages from the first supplementary
2004 budget in terms of GDP.

13. In 2005 we will implement several measures to ensure the sustainability
of the pension system. Already in August 2004, we decided that, starting
with 2005, pensions are adjusted only once per year in January, by the
rate of projected average inflation in the year. In January 2005, the
adjustment will be exceptionally limited to 3 percent, owing to the already
implemented adjustments in 2004. (The corresponding decision is a prior
action for completing the review.) By April 2005, we will approve amendments
to the Pension Law that will accelerate the increase in the retirement
age starting on July 1, 2005. Moreover, starting January 1, 2005, the
pensions for farmers who were insured under the former farmer pension
system will be paid from the state budget.

14. We have stepped up the fight against arrears. To address the
nonobservance of the performance criterion, we have identified the 22
companies with an unjustified increase in arrears above lei 20 billion
between December 2003 and June 2004 (section V of the TMU).
We are determined to cover the shortfall by means of forced execution
measures, by issuing a summons of forced execution to the debtor, against
6 companies, while initiating bankruptcy procedures against 3 other companies,
where forced execution measures are unlikely to yield results (initiation
of forced execution measures and submission of the request for initiation
of bankruptcy procedures to court will be prior actions). In addition,
AVAS will no longer institute or support any rescheduling or cancellation
of budgetary obligations without the prior approval of the Ministry of
Finance and consultation with IMF staff for already privatized companies.
The Ministry of Finance and the state-owned creditors will insist on proceeding
with bankruptcy procedures against the second largest refinery and oppose
any kind of judicial reorganization, merger, acquisition, or other related
scheme. Moreover, in the fight against tax evasion, by December 2004 we
will adopt a comprehensive implementation plan to: (a) eliminate the illegal
trade in petroleum products and cigarettes, areas where corruption is
perceived to be pervasive; and (b) to fight corruption in customs administration.
In addition, we will request technical assistance from the Fund to review
the legislation on prevention, discovery, control, and sanction of tax
fraud. Expenditure arrears of the budget will be reduced by paying health
sector arrears incurred in 2003 by end-September, while private sector
arrears are dealt with through bankruptcy procedures as specified in the
MEFP (paragraph 17). Meanwhile, Ordinance 37/2004 has reduced arrears
in the energy sector, as the Ministry of Public Finance has issued T-bills
and bonds to pay the historical debts of the gas distribution companies
and the privatized two electricity distributors.

15. In financing the 2005 budget deficit, we will give priority to
domestic borrowing to limit supply pressures for private sector credit.
Taking into account large expected privatization receipts from abroad,
we will limit our Eurobond issuance to not more than €600 million
in 2005. Domestic financing will aim at extending the maturity of lei-denominated
securities.

16. We will contain the issuance of all external off-budget guarantees
in 2005 to 1.6 percent of GDP, somewhat below the 2004 level. Within
the ceiling, we will give priority to projects for modernizing the energy
sector. We will limit the issuance of domestic guarantees to lei 2,000
billion.

C. Wage Policy

17. To protect the competitiveness of our economy, the minimum wage
will be increased only modestly in 2005. We will approve a government
decision, stipulating an increase of 10.7 percent in the statutory minimum
wage on January 1, 2005, to lei 3,100,000. We will refrain from raising
the minimum wage above this level throughout 2005 (continuous structural
PC). In negotiations on the national collective contract, government officials
will seek to ensure that the minimum wage in this contract does not deviate
from the statutory minimum wage. The system of national collective contract
will be reviewed in the context of the revisions of the Labor Code as
stipulated in paragraph 44 of the MEFP.

18. Our SOE wage policy in 2005 aims at improving the financial performance
of 72 large monitored companies by about ¼ percent of GDP.
The budgets of the monitored companies, limiting the annual wage bill
growth to 4 percent and specifying quarterly targets, will be approved
by end-December (structural PC). The target for March 2005 will be a quantitative
PC. With the scheduled reduction of employment by an average 9,700 positions,
this implies an average gross wage growth of about 7 percent in nominal
terms. To strengthen the credibility of our wage bill target, the ministries
will block payments equivalent to 4 percent of the quarterly wage bill
in monitored SOEs until the last month of the quarter and will release
it only after it has become clear that the respective target will be reached.

D. Energy Sector Reforms

19. We remain committed to the energy price increases agreed in the
MEFP, including the gas price adjustment scheduled for January 2005 (structural
PC in the orginal MEFP). Moreover, we will follow the recommendations
from the review of electricity prices that was performed in cooperation
with the World Bank by deciding by December 31, 2004, on increasing end-user
electricity prices, effective January 1, 2005 (structural PC in the original
MEFP), which will facilitate an increase of the hydro-power producer price
of at least 90 percent (structural PC), while at the same time deciding
to abolishing the national development tax, also effective January 1,
2005 (structural PC).

20. We will immediately initiate liquidation procedures against SOEs
which do not follow ORD 37/2004 on the payment of current utility bills
and the repayment of arrears. In this regard, we will amend Government
Ordinance 115/2003 in accordance with Government Ordinance 37/2004, which
will result in the general consolidated budget paying the difference between
the real value of shares received by Distrigaz to settle the bill and
the unpaid gas bills of Roman accumulated during the period October 2003-February
2004, when most of the company was state-owned.

21. We have approved a reform strategy for the district heating system
as an annex to Government Decision 882/2004. We will consult with
the World Bank on the implementation of all aspects of the strategy. In
addition, by October 15, 2004, we will prepare reports on: (a) the schedule
for reducing heat producer subsidies and increasing the National Reference
Price in the period 2005-07; (b) the plans for introduction of metering
by local administrations as submitted to the ministry of administration
and interior (MAI); (c) the master plans on district heating reform submitted
to the MAI by local administrations; (d) the restructuring of Termoelectrica's
high-cost units ("stranded assets"); and (e) the action plan
for implementing the heating strategy with necessary legislation to be
implemented, including a thermal energy law and the two-part (binomial)
tariff. On January 1, 2005, the producer heating price will be raised
in line with increasing costs (structural PC in the original MEFP), while
the National Reference Price (the ceiling for producer prices) will be
raised in July with a view to eliminating it by end-2007. The government's
plan for abolishing the National Reference price will be subject to particular
attention in the context of discussions on the forthcoming review.

E. Privatization, Liquidation, and Restructuring

22. We aim to achieve substantial further progress in the privatization
of utilities, building on recommendations from the World Bank. As
the Petrom sale has to be reviewed by the Competition Council, we remain
committed to resolve any issues that might arise from that review as necessary
for the successful completion of the deal. The privatization of the two
gas distributors is expected to result in the signing the contract by
end-October 2004 (structural benchmark), while a privatization strategy
for Electrica-Muntenia Sud aiming at receiving final bids by end-July
2005 will be ready by end-December (structural benchmark) and privatization
strategies for energy complexes Rovinari, Turceni, and Craiova will be
finalized by end-March 2005. Moreover, we will limit the floatation of
minority stakes in SOEs, among which Romgaz, on the Bucharest stock exchange
to 5 percent of the companies' share capital.

23. We will make speedy progress in divesting the companies under
AVAS. In addition to the structural benchmark of privatizing or liquidating
six large companies by end-September, we will divest the remaining three
by end-2004. We will either privatize or liquidate 15 smaller companies
in which AVAS holds a majority share package in Q3, another 20 in Q4 and
at least 20 in Q1 of 2005 (the last two targets are structural benchmarks).

24. We remain committed to instilling financial discipline in the
railways. By September 15, we will offer again for concession the
remaining segments of the 3,000 kilometer railway track that was supposed
to be divested by end-June. To prevent accumulation of arrears, the 2005
wage bill in the three railway companies will increase by no more than
8 percent. In addition, there will be no wage increases in the railway
sector in the remainder of 2004.

25. In 2005, we remain committed to accelerating the restructuring
of the hard coal sector, and the reduction of subsidies and transfers
to the mining sector in line with the approved mining sector strategy.
In addition to the 5,700 miners laid off by end-July 2004, an additional
2,300 layoffs have been initiated bringing the total reduction in mining
sector employment in 2004 to 8,000 by end-September. Utility payments
are being monitored closely, and all but one heavy loss-making mine, Baia
de Aries, are current on their payments. We have accelerated the closure
of this mine with 400 of the 650 miners given redundancy notice on August
15, 2004.

F. Monetary Policy and Banking Issues

26. The NBR will continue to focus on lowering inflation to single
digits while managing monetary policy's transition to a new framework.
Preparations for the introduction of the new inflation targeting regime
will be speeded up, and the confirmation of full-scale implementation
of the new framework will follow the accomplishment of two 'dry runs'
of the quarterly forecasting cycle.

27. Overperformance on inflation, together with large foreign currency
inflows in the first half of the year, indicate room for the NBR to gradually
lower the policy interest rate. Lower domestic real interest rates,
on the background of continued monetary policy prudence, will improve
the composition of bank lending in favor of local currency loans, thus
lowering the related risks. Furthermore, a lower policy interest rate
would diminish the yield differential between domestic and world markets
and hence incentives for large and potentially destabilizing volatile
inflows.

28. Meanwhile, credit growth remains of concern. To curb the recent
renewed surge in foreign currency-denominated credit, we have decided
to increase the reserve requirement for foreign liabilities from 25 percent
to 30 percent as of September 1. As of September 1, 2004, we will expand
the database of the NBR's Credit Information Bureau to include delinquent
loans below lei 200 million. In addition, we will include information
on (a) all debit and credit card frauds by cardholders, (b) the exposure
of non-resident legal entities, and (c) the total exposure on groups of
debtors.

G. Labor Market and Governance

29. Our efforts to strengthen public administration, eliminate corruption
and improve the business climate will continue in close cooperation with
the EU and the World Bank. In cooperation with the World Bank, we
are evaluating the impact of the new Labor Code on the labor market and
employment with a view to increasing labor market flexibility. The comprehensive
overhaul of the Labor Code in early 2005 will address concerns of the
stakeholders, among which are concerns about the Wage Guarantee Fund,
the binding nature of collective labor contracts for non-participating
employers, the procedures to determine the work load, regulations on hiring
and firing, the flexibility of fixed-term contracts, and red tape. The
overhaul of the code will be agreed upon with the World Bank within the
framework of the EU acquis, and be submitted to parliament by end-March
2005, with a view to implementing the new code on July 1, 2005. We will
follow up on the issues raised in the PricewaterhouseCoopers report on
SNTR, particularly with regard to the role of the minority shareholder,
and publish the results on the web site of AVAS by March 2005.

30. We will approve by end-March 2005 legislation amending Article 24,
paragraph 2 of the Law on Ministerial Responsibility (Law 115/1999),
to remove immunity for former members of the government.

IV. Program Monitoring

Owing to the forthcoming elections in November 2004, we will seek combined
conclusion of the second and the third review in early 2005.

Table 2. Romania: Additional Prior
Actions, Structural Performance Criteria and BenchmarksAgreed in
the Supplementary Memorandum on Economic and Financial Policies
of August 2004.1

Measures

Status

Prior Actions:

Approval, by September 15, of a second supplementary
budget which limits additional spending to lei 11,400 billion
(para. 9).

Government decision limiting pension adjustments
to once a year and to 3 percent, per January 1, in 2005, as specified
in para. 13.

Initiation of forced execution measures, by issuing
a summons of forced execution to the debtor, against 6 companies
(listed in Section V of the TMU), as provided
for in para. 14.

Submission of requests to court for initiation
of bankruptcy procedures against 3 companies (listed in Section
V of the TMU), as provided for in para. 14.

Structural Performance Criteria:

Continuous:

Refrain from broadening the scope of goods and
services subject to the reduced VAT rate of 9 percent and refrain
from introducing a second reduced VAT rate, as per para 11.

Refrain from increasing the minimum wage to a
level above lei 3,100,000 during 2005 (para. 17).

By October 15, 2004:

Submission to parliament of a draft 2005 budget
with a deficit of at most 1.5 percent of GDP, in accordance with
para. 10.

By December 31, 2004:

Approval of the budgets of the monitored companies,
limiting the wage bill growth to 4 percent and specifying quarterly
targets, in accordance with para. 18.

Decide on the increase of the hydro-power producer
price by at least 90 percent effective per January 1, 2005 (para.
19).

Abolishing the national development tax on electricity,
effective per January 1, 2005 (para. 19).

Structural Benchmarks:

By October 31, 2004:

Signing of the contract for the privatization
of the two gas distribution companies Distrigaz Nord and Sud (para.
22).

Ceilings on the Assumption of Enterprise Debt to Banks by the Consolidated
General Government and on the Issuance of Domestic Government Guarantees
on Bank Lending to Enterprises

IX.

Ceilings on Contracting or Guaranteeing of External Debt

X.

Indicative Targets for Ceilings on Broad Money

XI.

Indicative Targets for Ceilings on Banking Sector's Total Exposure
to State-Owned Enterprises

XII.

Indicative Targets on the Total Public Sector Deficit Financing

I. Ceilings on the Average Net Domestic Assets of
the National Bank of Romania

The average net domestic assets of the National Bank of Romania (NBR)
for the indicated month are defined as the difference between average
reserve money (as defined below) and average net foreign assets (as defined
in Section II of this attachment), both expressed in local currency.

Average reserve money is defined as the sum of average currency in circulation
outside the NBR and average deposits (required plus excess reserves) of
the commercial banks at the NBR for the indicated month. Commercial bank
deposits exclude required and excess reserves in foreign exchange for
foreign exchange deposits. Data on reserve money will be monitored from
the daily indicators data of the NBR, which shall be supplied to the IMF
weekly by the NBR. The stock of average reserve money as of March 2004
was lei 111,778 billion.

The reported figures of average reserve money will be adjusted in the
following circumstances:

(1) Should reserve requirements be increased/decreased from 18 percent
on all required reserves held in lei, the reported reserve money figures
would be increased/decreased by the product of the change in the reserve
requirements and the programmed deposits for which required reserves are
held in lei. The level of the programmed deposits is lei 242,609 billion
for June 2004, lei 282,934 billion for September 2004, lei 323,242 for
December 2004 and lei 326,329 for March 2005.

(2) The reported reserve money figures will be lowered by the shortfall
in actual reserves from required reserves for any individual bank, measured
from the 24th of the previous month to the 23rd of the test-date
month, as provided for in the relevant NBR regulation.

Average net foreign asset stocks will be converted into lei for the purposes
of calculating average net domestic assets at the average monthly lei/U.S.
dollar rates specified in consultation with Fund staff. The average stock
of NFA is defined as the average of the daily NFA as defined in Section
II. The limits will be monitored from daily data on the accounts of the
NBR supplied weekly to the IMF by the NBR. The average NDA as of March
2004 was lei -122,235 billion.

The ceiling on average net domestic assets of the NBR will be adjusted
under the following circumstances:

(1) Downwards (upwards), prorated for the fraction of the month that
gross foreign financing exceeds (falls short of) programmed levels, specified
in Section II, by the lei equivalent of the said excess (shortfall).

(2) For any change in reserve requirements as described above. Before
undertaking any such changes, the NBR will consult IMF staff.

(3) Upwards (downwards) by the lei equivalent of the decrease (increase)
in the stock of foreign currency denominated Treasury bills (cumulative
from end-March 2004).

(4) Downwards by the lei equivalent of the increase in foreign currency
receipts from large privatizations (sale price above $10 million, cumulative
from end-March 2004), excluding proceeds from the sale of BCR, as specified
in Section II.

(5) Downwards by the shortfall in actual reserves from required reserves
for any individual bank.

II. Targets for Floor on Net Foreign Assets of
the National Bank of Romania

Net foreign assets of the NBR consist of reserve assets minus foreign
liabilities. For the purposes of the program, reserve assets shall be
defined as monetary gold, holdings of SDRs, any reserve position in the
IMF, and holdings of foreign exchange in convertible currencies by the
NBR. Excluded from gross reserves are long-term assets, NBR redeposits
at the commercial banks, any assets in nonconvertible currencies, encumbered
reserve assets, reserve assets pledged as collateral for foreign loans,
reserve assets pledged through forward contracts, and precious metals
other than gold. Monetary gold shall be valued at an accounting price
of US$407 per ounce and SDRs at US$1.48597 per SDR. NFA stocks are measured
at the last working day of the respective month.

For the purposes of the program, foreign liabilities shall be defined
as loan, deposit, swap (including any portion of the NBR gold that is
collateralized), and forward liabilities of the NBR in convertible currencies
including foreign currency deposits of resident commercial banks at the
NBR; IMF purchases; borrowing from international capital markets; and
bridge loans from the BIS, foreign banks, foreign governments, or other
financial institutions, irrespective of their maturity.

All assets and liabilities denominated in convertible currencies, other
than the U.S. dollar, shall be converted at their respective exchange
rates against the U.S. dollar on December 31, 2003. Specifically, €1
= US$1.26145, £1 = US$1.7847, AUD1 = US$0.750, JPY1 = US$0.00934.
All changes of definition or valuation of assets or liabilities as well
as details of operations concerning sales, purchases, or swap operations
of gold shall also be communicated to the IMF staff.

The NFA of the NBR will be adjusted:

(i) upwards/downwards by 100 percent of the excess/shortfall of gross
foreign financing1 from the programmed levels
on a cumulative basis from end-March 2004 as follows:

June 2004

US$756.87 million

September 2004

US$756.87 million

December 2004

US$756.87 million

March 2005

US$756.87 million

(ii) by the change in the stock of foreign currency denominated Ministry
of Finance Treasury Bills including those issued for bank restructuring
(on a cumulative basis from end-March 2004. The outstanding stock on March
31, 2004 was US$450.891 million evaluated at the program exchange rates.

(iii) upwards by the amount of foreign currency receipts from large privatizations
(sale price above $10 million) (cumulative from end-March 2004), excluding
proceeds from the sale of BCR, which are already included in the target.

The end-of-period NFA will be monitored on the basis of the monetary
survey. Daily data will still be used, however, to calculate average NFA.
All data is provided by the NBR. The end-of-period NFA figure was US$7,304
million on March, 2004.

III. Ceilings on the Cumulative Deficit of the
Consolidated General Government

The consolidated general government includes the state budget; the budgets
of the local authorities; the social protection funds;2
the "Special Fund for the Development of the Energetic System",
the "Authority for the Sale of State Assets" (AVAS)3,
the "National Administration of Roads (AND)"; other extra-budgetary
operations of ministries financed by foreign loans; and the counterpart
funds created from the proceeds of foreign loans. Any new funds created
during the program period to undertake operations of a fiscal nature as
defined in the IMF's Manual on Government Finance Statistics will
be incorporated within the definition of consolidated general government.

Under the program, the deficit of the consolidated general government
will be measured based on (a) revenue and expenditure data provided by
the Ministry of Public Finance as well as (b) on "below the line"
financing data, i.e., the sum of domestic and external financing of the
budget as well as privatization proceeds received by all entities of the
consolidated general government and proceeds from the recovery of bank
asset and other state assets by AVAB. All efforts will be made to reconcile
the measurement of the deficit from "below" and from "above
the line". However, should these efforts not succeed in eliminating
the discrepancies, the respectively higher deficit number will be used
for program purposes.

For program purposes, net credit of the banking system to the consolidated
general government is defined as all claims of the banking system on the
consolidated general government less all deposits of the consolidated
general government with the banking system. Foreign-currency denominated
credit to government outstanding at December 31, 2003 will be converted
in U.S. dollars at the end-December 2003 exchange rate and from dollars
into lei using the rates specified in consultation with Fund staff. Foreign-currency
denominated credit newly issued in 2004 will be valued at the exchange
rates specified in consultation with Fund staff. Government loans to banks
at an interest rate less than the reference rate of the NBR to finance
on lending to economic agents are excluded from government deposits; an
agreed listing of the accounts to be treated as government deposits for
program purposes is contained in the FAD aide memoir "Romania: Measuring
the Fiscal Deficit", Part II, Appendix 11, February 1994.

The deficit target for 2004 will be adjusted downwards by the amount
of any excess revenue in the general government budget (excluding local
authorities) over the amount of lei 548,246 billion, which represents
the revenue estimate in the second supplementary state budget for that
year.

The set of 72 state-owned enterprises, whose wages are to be monitored
under Emergency Ordinance 79/2001, is specified in Government Decision
393/2004.

The wage bill targets will be adjusted as follows:

(i) downwards by the amount of savings due to "externalization"
(defined as the spinning off of a unit or its transfer to another entity,
or temporary/permanent transfers of employees when the sum of these
transfers exceeds 100 employees per month). In each month, savings from
externalization will be calculated on a company by company basis as
the product of the number of externalized employees so far and the company's
average gross wage.

(ii) if a company is privatized, downwards by the budgeted wage bill
of the privatized company, starting with the month in which the privatization
contract is signed.

The wage bills will be measured on a cumulative basis across the different
sectors, on a monthly basis. The Ministry of Labor and Social Protection
will undertake the responsibility of collecting data from the various
line ministries (regie autonomes and national companies) and AVAS (commercial
companies), and will report the wage bills and employment figures for
each of the monitored enterprises (including aggregate figures for each
ministry and for the overall total) to the IMF on a monthly basis. Employment
reduction resulting from all forms of outsourcing will be reported in
the "externalization" column of the respective tables, with
a footnote, if necessary.

V. Ceiling on the Stock of Arrears of Private Enterprises
to the State
Budget and the Four Social Security Funds

The ceiling applies to the outstanding stock of arrears of the set of
452 private companies (fully private or with state-ownership of less than
50 percent) monitored by the National Agency for Fiscal Administration
(NAFA). These 452 companies are a subset of the 549 companies (private
as well as state-owned) with the largest arrears to the state budget and
the four social security funds as of December 31, 2003. Data on the stock
of arrears of these 549 companies are published on a quarterly basis on
the external website of the Ministry of Public Finance (with a breakdown
into arrears to the state budget and each of the four social security
funds; separately for the stock of arrears including and excluding interest
and penalties). The complete data set is provided to Fund staff on a monthly
basis with a reporting lag of at most 35 calendar days following the end
of the respective month. The performance criterion refers to the stock
of arrears excluding interest and penalties. Changes in the stock of arrears
owing to the rescheduling/cancellation of arrears or any other reduction
of the stock that does not represent a cash payment to the general government
will not be reflected in the data used for measuring the stock of arrears
under the program. Fund staff has to be notified on a company-by-company
basis about all reschedulings/cancellations of arrears and/or other arrear-reduction
schemes within at most 5 business days following the approval of the rescheduling/cancellation/scheme.
For changes to the set of monitored companies, the targets will be adjusted
downwards/upwards by the amount of arrears of the companies removed/added
to the set. In particular, in the case of the privatization of a fully
state-owned company or a majority state-owned company on the above-referenced
list of the 549 companies, the respective company will be added to the
list of private companies (for the base date as well as for future test
dates) to which the performance criterion applies. These companies will
be added to the list in the moment of the final and binding signature
of the privatization contract. In the case of the initiation of bankruptcy
procedures against a company on the above-referenced list of 452 companies,
the respective company will be removed from the list (for the base date
as well as for future test dates) to which the performance criterion applies.
These companies will be removed from the list in the moment in which the
file requesting bankruptcy is submitted to court. The stock of arrears
at end-March 2004 was lei 54,866 billion.

Bankruptcy procedures will be initiated against the following companies:
ATLAS GIP SA, DIONISOS SRL, NOVATEX SA

VI. Indicative Target for Ceilings on Arrears of Monitored
State-Owned
Enterprises to the Consolidated General Government

The ceiling applies to the outstanding stock of arrears of the set of
72 monitored state-owned enterprises, whose arrears are to be monitored
under Emergency Ordinance 79/2001 and Government Decision 393/2004. Under
the ordinance, arrears are defined as accounts payable past the due date
stipulated explicitly in the contracts, or if no such explicit date exist,
30 days after services/products are provided. The reporting on total arrears
will have the following subcategories: to the state budget, to the social
security budget; to the local budget; to special funds; and to other creditors.
Arrears to the consolidated general government are defined as the sum
of the first four categories. Amounts reflecting tax arrears exclusive
of penalties will be reported separately. For arrears which have been
rescheduled/canceled or reduced by any means rather than a cash payment
to the general government, the rescheduled/canceled/reduced amounts (including
penalties) will not be counted as arrears reduction, and have to be reported
to Fund staff on a monthly basis, as part of the regular monitoring. The
report will include a breakdown of arrears to the ten largest creditors
for each company. The report will also include data on overdue claims
of each of the monitored companies, as reported under Emergency Ordinance
79/2001 and Government Decision 393/2004. For changes to the set of monitored
companies owing to privatization or the initiation of bankruptcy procedures,
the targets will be adjusted downwards/upwards by the amount of arrears
of the companies removed/added to the set. Data for monitoring purposes
shall be supplied monthly to Fund staff by the Ministry of Public Finance
by at most 35 calendar days after the end of the respective month. The
stock of arrears at end-March 2004 was lei 42,262 billion.

Floors will be set on the cumulative collection rates of the following
companies:

the combined rate (performance criterion) of Distrigaz Nord and Distrigaz
Sud (indicative targets on the individual company collection rates);

on the combined collection rate for heating and electricity of Termoelectrica,
including the production units externalized to local authorities (performance
criterion). Indicative targets will be set on the collection rates for
(i) electricity for both Termoelectrica and the production units externalized
to local authorities; (ii) Termoelectrica's district heating; (iii)
heating in the externalized units;

on Electrica's collection rate (performance criterion).

The floors on collection rates are defined as follows:

(i) Termoelectrica and local authority units (Heating sector), Distrigaz
Nord and Sud: Heating and gas bills are lagged by one month. Definition
of 12-month moving collection rate c(m) for the month m=1,2..12.:

Using these definitions, the collection rate of Termoelectrica including
the externalized units at end-December 2003 was 87.9, of Electrica 98.1,
and of the two gas companies 98.8. Data for these companies will be collected by the Ministry of Economy
and Commerce and reported to the IMF on a monthly basis. Revenue resulting
from obtaining shares through debt-equity swaps will be excluded from
collections, unless the shares are sold for cash. The Ministry of Economy
and Commerce will include in this report data on billings and collections
registered by Distrigaz Nord, Distrigaz Sud, Electrica and Termoelectrica,
as well as information on possible dis- and reconnections for the following
industrial (a) and heating (b) companies.

Also, to monitor actual payments in the electricity sector, the Ministry
of Economy and Commerce will include in these reports the following tables
on monthly payments.

a) a table containing amounts billed to Electrica by power generators,
paid by Electrica to power generators, and the payment rate (i.e. the
second column divided by the first column). The table will contain a separate
line for amounts billed and collected related to the developments tax
and hence amounts billed an collected by Electrica itself should exclude
the development tax.

b) Four collection rate tables from Termoelectrica containing amounts
billed to and received from electricity distribution companies. Table
one contains the total amounts billed and received, table two contains
amounts billed and received from Electrica, table three contains amounts
billed and received from Hidroelectrica, and table four contains amounts
billed and received from other TE customers. Hence the amounts in tables
2-4 should add up to the amounts in table 1. Each table should be split
up according to the amounts billed and received by the various Termolectrica
plants, i.e. Termoelectrica-core, Rovinari, Turnceni, Craiova, Deva.

For the period January 2004-April 2004, these tables will be compiled
retrospecitively. From April 2004 onwards, these tables will be included
in the monthly reports on collection rates.

The exchange rate (ROL per USD) used to calculate the annual producer
gas price increase of at least $25/tcm (LoI paragraph 23) per January
1 of each of the years 2005-2007, will not be lower than the average exchange
rate in the month of November preceding the date of the increase.

VIII. Ceilings on the Assumption of Enterprise Debt
to Banks
by the Consolidated General Government and on the Issuance of Domestic
Government Guarantees on Bank Lending to Enterprises

The ceiling applies to the cumulative stock from end-March 2004 of newly
guaranteed or assumed domestic debt by the consolidated general government.
For program purposes, the assumption of enterprise debt to banks by the
consolidated general government and the issuing of a guarantee to assume
enterprise debt to banks are treated as being equivalent. This limit includes
any loan on which the government pays or guarantees interest, even if
the principal is not guaranteed. The consolidated general government is
defined in Section III of this attachment. The criterion also applies
to the use of AVAS resources for recapitalizing enterprises or as collateral
for bank loans. Foreign currency denominated loans will be converted at
accounting exchange rates specified in consultation with Fund staff.

This ceiling excludes:

the contracting or guaranteeing of external debt, for which separate
limits are set out in Section IX of this attachment;

debt transferred in the process of bank restructuring, privatization
or liquidation of state-owned enterprises; and

the assumption of debt as a result of an activation of a guarantee
or collateral.

Data for monitoring purposes shall be supplied monthly to the IMF by
the Ministry of Finance. The stock of guarantees and debt assumed as described
in this section was lei 746 billion as of end-March 2004.

IX. Ceilings on Contracting or Guaranteeing of External
Debt

The ceilings apply to the cumulative flow since the beginning of each
year of newly contracted or guaranteed external debt by the consolidated
general government. The consolidated general government is defined in
Section III of this attachment. This performance criterion applies not
only to debt as defined in point No. 9 of the IMF Guidelines on Performance
Criteria with Respect to Foreign debt adopted on August 24, 2000 (Executive
Board Decision No. 12274-(00/85)) but also to commitments contracted or
guaranteed for which value has not been received. The ceilings also apply
to any assumption of loans for debt outstanding which were not previously
contracted or guaranteed by the consolidated general government. Excluded
from the ceilings are liabilities to the IMF and bridge loans from the
BIS, foreign banks, foreign governments, or any other financial institution.
Debt falling within the ceilings shall be valued in U.S. dollars at the
exchange rate prevailing at the time the contract or guarantee becomes
effective. Loans considered concessional are also excluded from the ceilings.
Off-budget debt includes all debt to non-budget entities from private
sector creditors guaranteed by the Ministry of Finance. Loans for fuel
imports for Distrigaz, Romgaz, Termoelectrica, and the 23 heat-producing
units which were transferred from Termoelectrica to local authorities,
and any further units externalized during the program, are included in
the overall ceilings, and the appropriate off-budget guaranteed debt ceilings.

Concessional loans are defined as those with a grant element of at least
35 percent of the value of the loan, using currency-specific discount
rates based on the commercial interest reference rates reported by the
OECD (CIRRS) in effect at the time of contracting or guaranteeing the
loan.

The ceiling for 2005 on contracting and guaranteeing external debt with
maturity over one year includes an Eurobond in the amount of €600
million In case an Eurobond is not issued or is issued for a smaller amount,
the ceiling will be adjusted downwards by 100 percent of the shortfall
on a cumulative basis beginning end-March 2005 as follows:

March 2005

US$ 780 million

June 2005

US$ 780 million (indicative target)

September 2005

US$ 780 million (indicative target)

December 2005

US$ 780 million (indicative target)

For the purposes of this adjustor only, an exchange rate of US$1.3/€1
will be used.

The 2005 ceiling will also be adjusted upwards in the amount of those
agreements included in the 2004 ceiling but not guaranteed during that
year. Those guarantees, and the associated maximum adjustments (to be
converted into US dollars at prevailing rates at the time of the transaction)
, would be limited to SNR broadcasting for modernization of TVR1 and TVR2
(US$ 70 million), TAROM purchase of 4 aircraft (US$38.5 million), Electrocentrale
CET Bucuresti Vest (€122 million), Unit 2 Cernavoda (€223.5
million), CFR (US$30 million), CET PALAS (US$40 million), Transelectrica
Brazi Vest (JPY 3000 million), Hidroelectrica modernization of Group VI
(CHF 30 million), EBRD Portile de Fer (€ 30 million), Transelectrica
Gutinas (€25 millioni), and CET Deva (€33.4 million).

The ceilings shall be monitored from data supplied monthly to the IMF
by the Ministry of Finance. The accumulated since January 1 flow of contracted
or guaranteed debt at end-March 2004 was US$157 million for maturities
over one year (US$1 million of which was off-budget), US$1 million for
the subceiling of debt with maturity of one to three years (all of which
was off-budget), zero for debt with less than one year maturity.

Nonaccumulation of external payments arrears of the government will be
a performance criterion monitored on a continuous basis. For program purposes,
arrears with respect to called-up sovereign loan guarantees are defined
as external payments overdue more than 30 days.

X. Indicative Targets for Ceilings on Broad Money

Broad money is defined as the liabilities of the banking system with
the non-bank public. Broad money includes foreign currency deposits of
residents, but excludes government deposits and deposits of foreign monetary
institutions and other non-residents. For the purposes of the program,
deposits which are denominated in foreign currency will be converted into
lei at the program exchange rates specified in consultation with Fund
staff.

Data on broad money will be monitored from the monthly monetary survey
data, which shall be supplied to the IMF monthly by the NBR. The stock
of broad money was lei 481,460 billion as of March 31, 2004.

XI. Indicative Targets for Ceilings on Banking Sector's
Total
Exposure to State-Owned Enterprises

Total exposure covers all loans, advances, holdings of debt and off-balance
sheet exposure of resident banks to state-owned enterprises. Data on loans
will also be reported separately from total exposure. State-owned enterprises
are all regie autonomes, national and commercial companies with majority
ownership by the general government, as defined in Section III of this
attachment. For the purposes of monitoring, foreign currency denominated
debt will be converted in lei at end-month leu/U.S. dollar exchange rates
specified in consultation with Fund staff. Foreign currency denominated
credit in convertible currencies, other than the U.S. dollar, shall be
converted at their respective exchange rates against the U.S. dollar as
specified in Section II. Data on banking sector lending to state-owned
enterprises will be monitored from monthly data provided by the NBR.

The amount of total exposure, as reported by the NBR, will include (on
a cumulative basis from end-March 2004):

(i) exposure to companies where the majority ownership shifted to the
private sector. For this purpose, AVAS and the relevant ministries will
provide a monthly update of their portfolio to the NBR;

(ii) any amount of debt or off-balance sheet write-offs; and

(iii) any assumption of debt or off-balance sheet items by the general
government or other public bodies.

The amount of total exposure will exclude BCR's performance guarantees
to the company Romtechnica, incurred before 1989, which are assumed by
the state but still kept in BCR accounts as an off-balance sheet item.

Additionally, the NBR will report monthly on total exposure of the banking
system to state-owned enterprises with outstanding exposure over lei 100
billion, on a company-by-company basis. The stock of banking sector exposure
to state-owned enterprises at program exchange rates as of March 31, 2004
was lei 49,260 billion of which BCR's exposure was lei 17,377 billion.

XII. Indicative Targets on the Total Public Sector
Deficit Financing

The Public Sector Deficit Financing is monitored on a monthly basis and
compiled by the Ministry of Finance, with data also supplied to the Ministry
by the NBR and the National Securities and Exchange Commission (CNVM).
It consists of the financing of the consolidated general government as
defined in Section III and the state-owned enterprises.

The consolidated general government financing consists of net
external financing, non-bank financing, and bank financing. Net External
Financing comprises sovereign bond and BOP support loans, on-budget
project financing, leasing operations of ministries and local governments,
and T-bills, issued domestically, held by non-residents (computed separately
in lei and foreign exchange). Non-Bank Financing comprises privatization
receipts (total privatization receipts of all components of the general
government independent of whether they are transferred to the treasury),
asset recovery (AVAS receipts from asset recovery transferred to the consolidated
general government), municipal bonds (bonds issued by the municipalities
either domestically or internationally, computed as the difference between
issuance and redemptions during the month), and T-bills and bonds held
by the non-bank public (computed separately in lei and foreign exchange).
Bank Financing is defined as the sum of T-bills and bonds in lei
held by banks, T-bills and bonds in foreign currencies held by banks,
bank loans in lei and foreign currencies, decrease in government deposits
in lei (a positive number indicates a decline in deposits), and decrease
in government deposits in foreign currencies (a positive number indicates
a decline in deposits).

The state owned enterprises financing consists of net external
financing, bank financing, and the accumulation of arrears. Net External
Financing comprises of state-guaranteed bills and bonds (excluding
called guarantees and including state-guaranteed fuel imports), bills
and bonds without state guarantee, state-guaranteed loans (excluding called
guarantees), and loans without state guarantee. Bank Financing
is defined as the sum of the increase in credit to SOEs (computed separately
in lei and foreign exchange), and decrease in SOEs deposits (computed
separately in lei and foreign exchange; a positive number indicates a
decline in deposits). The accumulation of arrears is defined as
increase of arrears to the general government by the group of 72 large
monitored SOEs, excluding interest and penalties as specified in the law.

The monthly flows of financing are approximated by the following methodologies:

(i) for stocks in leichange of stocks between the end of the respective
months;

(ii) foreign exchange stocks expressed in lei are first converted in
U.S. dollar stocks using the end-month leu/U.S. dollar exchange rate.
Then the change in U.S. dollar stocks is converted in lei by using the
monthly average leu/U.S. dollar exchange rate;

(iii) foreign exchange flows expressed in U.S. dollars are converted
in lei by using the monthly average leu/U.S. dollar exchange rate; and

(iv) conversion of stocks and flows in foreign currency other than the
U.S. dollar in U.S. dollars is done according to the convention of the
reporting institution (usually, the market exchange rate either at the
time of the transaction or at the end of the month).

The principal providers of data are:

(i) the Ministry of Finance on:

- sovereign bonds and BOP support loans;
- on-budget project financing;
- privatization receipts;
- asset recovery;
- state-guaranteed bills and bonds;
- state-guaranteed loans (excluding called guarantees); and
- the accumulation of SOE arrears to the general government by the group
of 72 large
monitored SOEs.

(ii) the NBR on:

- leasing operations of ministries and local governments;
- T-bills, issued domestically, held by non-residents;
- T-bills and bonds held by the non-bank public;
- T-bills and bonds in lei and foreign currencies held by banks;

- bank loans in lei and foreign currencies, including to the "National
Road Administration" (AND);
- decrease in government deposits in lei and foreign currencies, including
deposits of the "National Road Administration"( AND) ;
- externally issued bills and bonds by SOEs without state guarantee,
- external loans to SOEs without state guarantee;
- domestic bank loans to SOEs; and
- decrease in SOEs deposits with domestic banks.

(iii) the National Securities and Exchange Commission on local government
bonds.

1Foreign financing is defined
as disbursements of balance of payments support loans to the government
with a maturity of more than a year from multilateral and bilateral creditors
and resources with a maturity of more than one year raised in the international
capital markets by the government. This excludes use of IMF resources.2These include the State Social Security Fund,
the Insurance Fund for Work-Related Accidents, the Unemployment Fund,
and
the Health Social Insurance Fund.3AVAS emanated from the merger of the "Privatization
Agency" (APAPS) and the "Asset Recovery Agency" (AVAB)
on May 1, 2004. Before this merger, APAPS was a component of the consolidated
general government, while AVAB was not.